Audit finds Securities deficiencies

The Utah Division of Securities was rife with personnel conflicts, had unclear roles in handling duties and managed cases inconsistently and sometimes inappropriately, according to a legislative audit report released Friday.

The leader of the Department of Commerce, which includes the division, says steps to correct most of the deficiencies cited in the audit have been implemented, except for one that will require legislative action.

The audit report said concerns raised by people investigated by the division involved "procedural errors, an alleged overzealous pursuit of securities violations, and the perception that those investigated do not receive fair treatment"  all of which were "heightened" by personnel conflicts within the division.

"These concerns appear to be a result of the division not following established policies and procedures," the audit report states. "Case management is inconsistent and, at times, appears inappropriate. ... The division has significant authority, but its credibility depends on using that authority judiciously."

A pair of legislators requested the audit, in part because of controversy over the division's handling of a securities-fraud investigation. The auditors looked at more than 20 cases the division handled in recent years.

The recommendations call for clarifying or establishing policies that better define the roles of the division director and the presiding officer of division cases, outline interaction with the attorney general's office, and guide case management. Others seek a change to the division's advisory board to make it a commission providing division oversight.

In a letter included in the audit report, Francine Giani, executive director of the Commerce Department, listed ways that the audit recommendations already have been implemented.

"We have made the changes that have been requested, except for one which requires a legislative change, and we have a sponsor for a bill to change the way the board is structured, and we will do that next session," she told the Deseret News.

Complaints about the division included that it "used intimidation to coerce cooperation and violated settlement agreements" forged with people it investigated, according to the audit report.

Rep. Jim Bird, R-West Jordan, who requested the audit, told the Deseret News that most of the report's findings were expected.

"The audit, I think, has come back and said, 'You know, there's a huge problem in the Division of Securities, and it's going to take some huge problem-solving people to fix them.' And it also indicates it's going to take some legislation to fix the advisory council," Bird said.

The audit findings "absolutely" confirmed what he had been told by people inside the division and by people investigated by the division, he said.

"It's not a surprise to me, to read these things and to hear these things and to think back about the people who have come to me and have said, 'Jim this is happening to me. What do we do?' Well, now what we have is documented proof instead of hearsay that these things have been going on," Bird said.

Bird was a critic of former division director Wayne Klein. One case that drew attention was in 2005, when the division accused a broker  reportedly a former business associate of Bird's  of failing to adequately supervise another broker who was selling unregistered securities.

Giani said many of the cases in the audit were under way before she became the department's director, and she said she wished investors had been included in the audit.

"It would have been nice to hear from the other side, to hear from victims who have received money and who think the things the division does is good, and that was not a part of the audit," Giani said. "We believe the audit raised a number of questions, and that we feel changes to the division would be beneficial. We've done those, and we will continue to move forward and continue the important work of the division."

Klein left the post of division director earlier this year, after the division came under fire for handling a case involving four employees with a stock-brokerage and investment firm. In a prepared statement, Klein said it is "unfortunate" that the audit's focus was responding to people who had been investigated for securities fraud.

"That the audit would focus so much attention on gathering information from people accused of violating the law is akin to trying to evaluate the performance of a police department by interviewing only those people the agency had put in jail," he said.

He said he hopes the division and department "can continue to carry out their public protection roles as they move forward and that this audit report does not make it too difficult to discipline brokers or get restitution for victims of investment fraud in the future. The state needs to be as vigorous in representing its clients  Utah citizens  as fraud promoters and the brokerage industry are in representing their own interests."

The audit report described the division as having "a negative culture" and poor morale. Having four directors during the past five years has "brought changes in management philosophy and an increased likelihood for inconsistent decisions," it said. Internal personnel conflicts "have been on ongoing problem," it said, although it acknowledged that so far, "in spite of the conflicts, it appears the division is accomplishing its mission."

Giani said those matters have been addressed through a policy change and through methods to improve both internal and external communication.

On Friday, Giani told the audit subcommittee of the Legislative Management Committee that the recommendations in the report "will help the division more effectively accomplish their mission."

To help fix the negative culture, Giani said the division's new director is meeting with staffers to get ideas and suggestions. Policies and procedures have been changed, she said, "and attitudes, we hope, will come with that."

Senate President John L. Valentine, R-Orem, recommended to Giani that the policy and procedure changes be implemented quickly and that Giani report about them to either the interim committee or the audit subcommittee.

The audit report next will be considered by the Legislature's Business and Labor Interim Committee.